Legal Updates

Perry _work (1)

Update

Tuesday, August 16, 2016

Introduction

In July 2016, the TSX Venture Exchange (the “TSXV”) issued a second progress report (the “Report”) to provide an update on the various initiatives outlined in its December 2015 white paper Revitalizing TSX Venture Exchange – Canada’s Public Venture Market (the “White Paper”), which were intended to address challenges market participants face in Canada’s public venture market[1]. In addressing these challenges, the TSXV has made three principal commitments, as follows: (i) reducing administrative and compliance costs of its listed issuers while maintaining investor confidence, (ii) expanding the base of investors financing companies and generally enhancing liquidity, and (iii) diversifying and growing the stock list to increase marketplace attractiveness.

Since publication of the White Paper, the TSXV has held a number of ‘Town Hall’ meetings at major cities across Canada to give public venture capital market stakeholders an opportunity to provide feedback on its proposals. After receiving feedback from stakeholders, the TSXV elevated in priority its proposal to examine TSXV filing procedures with the goal of saving issuers time and money, as well as that of addressing concerns related to market structure and short selling rules, the latter of which was not addressed in the White Paper due to such concerns being outside the scope of the TSXV’s authority. However, the TSXV has committed to working with regulators to influence decisions related to such concerns, and progress in this regard is evident from the Report.

Key Initiatives

The Report highlights three key initiatives with respect to which the TSXV is making significant progress in addressing the concerns set out in the White Paper, as summarized below.

(i)                  Periodic Auction Market

In attempting to address concerns of stakeholders regarding short selling, liquidity and market structure, the TSXV has presented a proposal to the Investment Industry Regulatory Organization of Canada and various securities commissions to establish a periodic auction market whereby buy and sell orders of securities would be aggregated and matched at set times during the trading day (as opposed to trading in the continuous auction market).

Early-stage public companies that are less liquid would be able to opt-in to this alternative model. While such a system would not necessarily enhance liquidity for these companies, it is anticipated that it would increase the chance of matching buy and sell orders. Additionally, while a periodic auction market would not prevent short selling, it is anticipated that it would help reduce the volatility that can occur with short selling by giving the market time to digest prior trades. 

The TSXV intends to continue to work with stakeholders to stress test this plan and has indicated that it may explore a pilot program to this effect in the future.

(ii)                TSXV LiquidityPro

The TSXV intends to launch a new market making service, TSXV LiquidityPro, in September 2016. The service is designed to increase liquidity for TSXV-listed companies by allowing issuers to select from a pool of pre-qualified, licensed providers that could, among other things, provide quotation services and facilitate price discovery. According to the Report, key features of TSXV LiquidityPro will include management of a competitive bidding process for such providers, monthly reporting on provider performance and activity, and TSXV governance and administrative services. TSXV LiquidityPro will be optional for issuers, and the fees associated with the program will depend on the terms of the provider’s engagement.

(iii)              Policy Amendments to Significantly Reduce Issuer Costs

The TSXV intends to reduce administrative and compliance costs to its listed issuers through a number of initiatives. To this end, the TSXV has proposed to eliminate its sponsorship requirement, subject to regulatory approval. The TSXV makes clear that its intent is not to completely abandon the idea of independent due diligence, but rather to provide for more flexibility in the manner in which the TSXV derives comfort that a particular company’s disclosure document does not contain misrepresentations of material facts, noting (correctly) that there are many ways to conduct due diligence that do not involve sponsorship.

The TSXV also intends to revise its shareholder approval requirements, and a proposal in this respect has been submitted to certain of the securities commissions and is awaiting their approval. The policy revisions will, among other things, remove the requirement of shareholder approval for inactive companies completing an arm’s length reverse takeover or change of business transaction.

Subject to regulatory approval, the TSXV estimates that these amendments, together, will reduce the cost of going public by as much as 40%.

Update on White Paper Initiatives 

The Report also provides an update on the progress made with respect to the various action items detailed in the White Paper, many of which, the TSXV posits, are already benefiting the market. With respect to the TSXV’s three principal commitments as set forth above, the Report indicates that significant progress will be made in both reducing administrative and compliance costs and in expanding the base of investors financing companies and generally enhancing liquidity.  

The TSXV expects a number of initiatives aimed at cost reduction and enhanced liquidity to be formally implemented in the third quarter of 2016. These initiatives include recognizing active and proven directors and officers, extending the interval to renew a Personal Information Form from three years to five, simplifying TSXV continued listing requirements, providing additional tools for companies to reactivate from the NEX board (a trading forum for listed companies that have fallen below the TSXV’s ongoing listing standards), and eliminating Tier I and Tier II and deferring to “national escrow”. Indeed, some proposals have already been implemented, including automated online filings for private placement transactions, enhancements to the TSX Venture 50 program, and the launch of the ‘TSX investinit’ website and app, which stream summaries of current treasury offerings of TSX- and TSXV-listed companies. 

Progress with respect to the TSXV’s third principal commitment (being the diversification and growth of the stock list to increase marketplace attractiveness), while slightly off the pace of the other two commitments due to its contemplation of a number of long-term initiatives, is nevertheless being made, and is expected to include revisions to the Capital Pool Program in the third quarter of 2016 as well as customizing TSXV policies to the needs of innovation companies.

Conclusion

The Report indicates that the TSXV has taken significant steps in addressing the challenges facing Canada’s public venture market. While a number of the proposals remain a work-in-progress and/or subject to approval by various securities regulatory authorities, it appears that the TSXV is taking advantage of its unique position to advocate for the interests of venture issuers in order to influence regulators. The impact of these various initiatives remains to be seen, but it is evident that progress has been made and will continue to be made in addressing the TSXV’s initiatives for the benefit of all market participants.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.[1] Our previous legal update regarding the White Paper can be found here.